The Securities and Exchange Commission has sued communications company Kik over the company’s creation and sale of a cryptocurrency in September 2017.
That sale, which the SEC alleges was an unregistered securities offering that broke laws designed to protect investors, raised $100 million.
The SEC’s suit against Kik, which is known primarily for its encrypted communications app, is the largest enforcement action taken by the regulatory agency since the explosion of initial coin offerings, or ICOs, by startups and other companies in 2017. The SEC’s civil complaint seeks the same amount of money, $100 million, that Kik raised through its ICO.
The SEC alleges Kik had no software in place to use the digital tokens — the nominal purpose for creating the digital tokens — and that Kik publicly marketed the digital currency, known as Kin, as an investment opportunity similar to a security, while selling it privately before public sale at a discount, similar to stock in a company before a public listing.
The SEC also alleges that Kik created and sold the currency to save the company, and that executives privately believed would go out of business without the sale.
Those offerings, which involved the creation and sale of digital currencies, raised billions in capital and was seen by tech entrepreneurs as a way to bypass traditional venture capital to raise money. However, in mid-2017 the SEC published a warning against ICOs, saying that they typically fell under the standard definition of a security, similar to a stock or bond, and would require registration and disclosure.
“Companies do not face a binary choice between innovation and compliance with the federal securities laws,” said Steven Peikin, co-director of the SEC’s Division of Enforcement in a release. “By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions.”
In an emailed statement, Kik CEO Ted Livingston responded: “This is the first time that we’re finally on a path to getting the clarity we so desperately need as an industry to be able to continue to innovate and build.”